Gridlock and inefficient policy instruments

David Austen-Smith, Wioletta Dziuda, Bård Harstad, Antoine Loeper

Research output: Contribution to journalArticle

Abstract

Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier to repeal than efficient instruments. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument.

Original languageEnglish (US)
Pages (from-to)1483-1534
Number of pages52
JournalTheoretical Economics
Volume14
Issue number4
DOIs
StatePublished - Nov 1 2019

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Keywords

  • D78
  • Dynamic games
  • bargaining
  • political economy
  • political instruments

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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